Managing ‘Black Tax’: 5 Things to Do If You Are In Your 20s

Here’s the way things probably are right now. You just got employed and have to face the financial burden of supporting your family. This can be providing financial assistance to family members in need, paying for education or other necessities, and supporting community projects.

In a nutshell, you’re paying black tax. Black tax describes the financial distress many young professionals face in providing for themselves, their extended families, and their communities.

Paying black tax can be stressful especially if you don’t have a fat paycheck like most 20-year-olds.  Its impact on your finances is even more painful. It can limit your ability to save, invest, or even borrow. 

What's more?  It can also create feelings of stress and financial insecurity.

But here’s the good news. In this article, you’ll discover how to deal with ‘ black tax’,  remove yourself from dependency, and improve your financial literacy. You’ll also learn how black tax affects your finances.  

Here we go!

How ‘Black Tax’ Affects Your Finances

1. It Affects Your Ability to Save

The burden of financially supporting your extended family can limit your ability to save for the future. This is because a significant portion of your income goes towards supporting others, leaving you with less money to nurture and grow your savings.

For instance, if you spend Ksh10,000 monthly to support your family, that’s Ksh120,000 per year. That’s money you could use to establish an emergency fund.

>>>>> Learn more about saving accounts.

2. It Affects Your Ability to Invest

‘Black tax’ can divert funds that would otherwise be available for investing. If we stick with our example above, instead of giving your extended family Ksh120,000 each year, consider investing all or half of it in an interest-earning account. 

There are many different types of interest-earning investment accounts that you can consider depending on your risk tolerance. 

Common options include:

• Savings Accounts: These are relatively low-risk accounts offered by banks and other financial institutions. 

• Money Market Funds: These are investment vehicles that offer higher interest rates than savings accounts, but with slightly more risk. A money market fund invests in short-term, low-risk securities such as government bonds.

• Bonds: Bonds are fixed-income securities issued by governments and corporations to raise capital. In return, you’ll earn interest payments and the return of your principal at a specified time in the future.

• Mutual funds: Mutual funds are investment products that pool money from many investors and invest it in a diversified portfolio of stocks, bonds, and other securities. Although they offer the potential for higher returns, they also come with higher fees and more risk.

• Exchange-traded funds (ETFs): ETFs are similar to mutual funds, but they are traded on stock exchanges and can be bought and sold throughout the day like individual stocks. 

Carefully research and compare different investment vehicles to find the right one for your needs and goals. It’s also a good idea to consult with a financial advisor to help you make informed decisions.

Read Also: 7 Common Investing Mistakes to Avoid.

3. Black Tax Can Negatively Impact Your Mental Health

Supporting your extended family financially early in your career can hurt your mental health. This is because it can create a sense of financial stress and burden, as well as feelings of guilt, obligation, and pressure.

Your family needs can make you struggle to balance your expenses and financial goals. This can cause anxiety and stress as well as frustration and resentment.

In addition, ‘black tax creates a sense of social pressure and obligation as you may feel you must provide financial support to your family and communities. 

This can lead to feelings of guilt and shame if you’re unable to meet these expectations and can contribute to mental health challenges such as depression and low self-esteem.

You wouldn’t want to lag in savings and investments because of ‘black tax’. That’s why you need to manage it early on. Here’s how.

Read Also: How ‘Black Tax’ Impacts You Financially and How to Manage it Better

5  Ways to Deal With Black Tax

1. Remove Yourself from Dependency

Although it might seem daunting, removing yourself from dependency is the most straightforward way to free yourself from black tax. When you no longer want to offer black tax, communicate this decision to your family openly and respectfully. 

Here are some steps you can take to have this conversation:

1. Set aside time to talk with your family to ensure you’re on the same page.
2. Start the conversation by expressing your love and gratitude for your family and explaining why you want to have this conversation. Be clear and direct about your decision and explain the reasons behind it.
3. Listen to your family members' reactions and concerns, and try to understand their perspectives. Be prepared for them to be surprised, disappointed, or upset by your decision, and try to respond to their emotions in a supportive and understanding way.
4. Discuss potential alternatives to financial support, such as offering emotional support, helping with childcare, or other household tasks.
5. Create a plan on how your family will move forward without your financial support. You can discuss financial literacy concepts such as budgeting,  investing, and debt management.

Although having this conversation with your family can be difficult, be honest and direct about your decision and work together to find ways to support each other healthily and sustainably.

Read Also:  Money Conversations You Must Have With Your Partner.

2. Budget for Black Tax

A budget can be a helpful tool for managing the financial burden of supporting your family. It’ll help you identify areas to cut expenses to free up more money to uplift your family.

 If you don’t know how to create a budget, don’t fret.  Here are a few steps you can follow.

1. Determine your income and expenses: Start by listing all of your sources of income, including salary, investment earnings, and any other source of income, and then list all your expenses.
2. Create a budget plan: Use the information you gathered in step one to create a budget plan that outlines how much you’ll allocate for each expense. Remember to include a category for savings in your budget plan so that you can set aside money to support your family.
3. Track your spending:  Tracking your budget ensures you stick to it. Besides, it will enable you to identify areas where you may be overspending and make adjustments as needed.
4. Review and adjust your budget regularly: As your income and expenses change over time, adjust your budget accordingly. 

Read Also: How to Budget & Save A Lot of Money as An Employee In Kenya.

3. Set Deadlines for How Long You Can Offer Support

Setting deadlines when offering support to your extended family or anyone else can help you achieve your short-term and long-term goals faster. 

Here are a few steps you can follow to set deadlines for how long you can continue to offer support:

1. Communicate with your family. Talk to your family members about your finances and the limits of your ability to offer support. Make sure they understand why you have to do it.
2. Determine your priorities. Consider your financial needs and decide how much support can offer.
3. Set deadlines. Based on your priorities and the support you can offer, set deadlines for how long you can continue supporting them. Make sure these deadlines are realistic and communicate them to your family.
4. Review and adjust as needed. As your financial situation changes and your family's needs evolve, be prepared to review your deadlines as necessary. Be flexible and open to negotiation, but also be firm in upholding your boundaries and priorities.

Read Also: Money, Extended, Family and Me: A successful Cousin’s Chama Is Born.

4. Pay Yourself First

"Pay yourself first" is a financial principle that suggests you save and invest a portion of your income for your financial goals before spending on other expenses.

This strategy can also help avoid overspending on extended family.  To apply this principle in this situation,  set aside a specific amount of your income each month for giving to extended family, and then make sure to stick to that budget. 

Developing this habit can help you avoid debt or sacrificing your financial goals to support your family. 

Read Also: What Does Paying Yourself First Really Mean?

5. Educate Your Family About Personal Finance and Investing

Lastly, you can manage black tax by educating yourself and your family about personal finance. Have conversations about managing your income, expenses, savings, and debt. This way, you’ll become financially literate. Your financial lives will improve.

Some components of financial literacy include: 

1. Understanding how to create and stick to a budget. 
2. Learn about different types of savings accounts and investments, and choose the ones that are right for your financial goals and risk tolerance.
3. Understand the different types of credit and how to use credit responsibly, including avoiding high-interest debt and paying your bills on time.
4. Knowing how to protect your finances by setting up an emergency fund, insuring your assets, and avoiding scams and fraud.
5. Staying informed about changes in the economy and how they might impact your finances.

You can also share your own experiences and challenges with managing your finances and offer support and guidance as needed. Additionally, you can encourage your family members to seek out educational resources and tools, such as books, online courses, or financial advisors, to help them improve their financial knowledge and skills.

Wrapping Up

In conclusion, managing black tax in 2023 will require a combination of financial literacy, discipline, and planning. By educating yourself and your family about personal finance, budgeting for black tax, ‘paying yourself first’,  and setting deadlines for how long to offer support, you can manage black tax better.

Additionally, practicing financial discipline and staying informed about the economy can help you make better financial decisions and achieve your financial goals. With these strategies in place, you can manage the impact of ‘black tax’ on your finances and support your family and community.